Definition of Bankruptcy Remote

Corporate bankruptcies are complicated cases, particularly when a company in bankruptcy legally is affiliated with other business enterprises. When a company that is part of a larger corporate group of businesses (with common ownership) files for bankruptcy, a legal concept known as "remote bankruptcy" becomes an important consideration. The reality is that many times only the company entering into bankruptcy is experiencing financial problems while the rest of the group is in good fiscal health. Creditors of the company in bankruptcy may attempt to seek debt satisfaction from other companies in the group. The concept of remote bankruptcy prevents such action.

Holding Companies and Subsidiaries

Many business enterprises are part of a larger corporate structure. A particular company may be the wholly owned subsidiary of a corporation. That same company may have affiliated companies and subsidiaries of its own. Although these different companies have some legal connections they generally will be operated independently. As a result, they are legally independent of one another when it comes to their legal liabilities.

The Corporate Veil

There is a long established legal doctrine known as "the corporate veil" that underlies bankruptcy remote. Under this principle, a business is legally considered and treated as a separate, independent legal entity. The individual company alone is responsible for its debts and liabilities. This doctrine is respected provided the business truly is independent and is not merely a sham or is not independent in its operation.

Effects

The net effect of the doctrine of the corporate veil and remote bankruptcy is that a creditor of a company in bankruptcy is precluded from "piercing the corporate veil" to "go after" the assets of an affiliated company to satisfy an existing debt. Thus, the other companies in a corporate group are protected from the reach of creditors of the entity in bankruptcy.

Benefits

The benefits of the doctrine of bankruptcy remote accrue to the individual companies within a corporate group that includes an entity in bankruptcy. No matter the negative financial condition of entity in bankruptcy, the related holding company, subsidiaries or affiliate enterprises will be unaffected. The assets of these other entities will be beyond the reach of creditors in the vast majority of cases.

Time Frame

For a corporate group to be able to benefit from the doctrine of bankruptcy remote, that system must be well established. In other words, the affiliated company system cannot be of recent origin. If the corporate system is new in its creation at the time one of the entities files for bankruptcy, a determination that bankruptcy remote is inapplicable may be made by the court. In such a situation, creditors will able to reach the assets of other companies in the group. There is no specifically set time frame in this regard. The bankruptcy court will consider all of the factors under the circumstances.

References

• The Law of Corporation: In a Nutshell, Robert W, Hamilton, 2000
• Bankruptcy Remote Structuring

Resources

• American Bar Association, Bankruptcy & Insolvency Litigation Committee